You Owe, You Owe, Off to the IRS You Go

(Originally published by the La Quinta Chamber of Commerce’s “The Gem” Magazine JAN2016)

The old adage, “if you ever find yourself in a hole, stop digging,” is never more truer when it comes to owing taxes.

This tax season several taxpayers will wait until the very last minute to file their tax returns. Why? It’s not because of any far-reaching audit conspiracy. It’s because these taxpayers owe money…on top of previous taxes owed in prior years. Call it stacking; call it pyramiding; call it trying to find a Peter to pay Paul. In any form, taxpayers must stop digging.

Taxpayers have some options if they are unable to pay their assessed tax liability. The best option is to full pay the taxes when they are due. United States citizens live in a pay-as-you-go tax society, which means that taxes must paid as income is earned. Taxpayers do this either through withholdings or by making estimated tax payments.

If taxpayers cannot full pay their taxes when due, several tax agencies will allow for payment plans. For example, the Internal Revenue Service will give taxpayers a no-questions-asked 120 days to full pay their liability. The IRS will also enter into an installment agreement with taxpayers; the length, term and conditions dependent upon the amount of taxes owed and prior tax history of the taxpayer. Keep in mind, however, there is an application fee associated with setting up an installment agreement.

Unfortunately, an installment agreement is similar to house arrest. The IRS must receive the payment no later than 10 days after the due date; otherwise the installment agreement is cancelled and the entire balance becomes due. Also, the IRS will not allow taxpayers to continue to owe year after year; taxpayers must full pay their taxes by the due date of the return.

Taxpayers who do owe prior years and are in danger of owing again should file their tax return right away. After 2-3 weeks, taxpayers can call the IRS and request (yes, it is a request) an installment agreement for all prior years PLUS the current year.

There are some potential trip-falls asking for an installment agreement. Depending on the amount, the IRS may ask for a financial statement, which is submitted on IRS Form 433-F: Collection Information Statement. The IRS may also ask taxpayers to pay this by debiting a bank account. Of course, the IRS will explain to taxpayers that penalties and interest will continue to accrue until the liability is full paid. The IRS will further explain that if taxpayers are unable to keep up with the installment agreement, taxpayers should contact the IRS right away.

Taxpayers do not need a tax professional to setup a 120-day hold or an installment agreement; these options are relatively simple to establish. Unfortunately, several taxpayers are unable or unwilling to continue with the terms of the installment agreement. Most taxpayers believe they can negotiate better terms with the IRS or ignore the next IRS letter after the missed due date. Nothing can be further from the truth. This is the time to hire a professional.

Some Enrolled Agents, Tax Attorneys and Certified Public Accountants are specifically trained to deal with the Collections Divisions of tax agencies. These professionals know how to respond to enforced collection action, something most taxpayers are not equipped to understand or handle.

The longer taxpayers wait to resolve a collection issue, the harder it will be to resolve the liability painlessly.

Joseph M. Tames is an Enrolled Agent (a federally-licensed tax practitioner.) He has over 20 years’ experience, specializing in tax audits, appeals, protests, collections and bankruptcy options. For the latest in tax planning and defense, please call him at 760-851-5999. You can also reach him by email at jtames@askmytaxmanjoe.com  or visit his website at http://www.askmytaxmanjoe.com.